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Business Continuity and Registered Brokers and Dealers in 2020

April 2, 2020
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We have been through it before. Almost eight years ago, Hurricane Sandy led to the temporary closure of the equities and options markets. The SEC, FINRA, and CFTC contacted firms with prominent market presence to understand how the Hurricane affected the securities industry and how well business continuity plans (“BCPs”) and the disaster recovery procedures were implemented. As more fully described in FINRA Regulatory Notice 13-25, the regulators described the following areas that merited consideration [with relevant comments in brackets] to improve responses to significant large-scale events:

  • Widespread disruptions: [Proximity of vendors and remote access of staff along with suitable means of access and communication]
  • Alternative locations: [Accessibility, adequacy of resources]
  • Critical vendor relationships: [Adequacy of vendor BCPs; assessing vendor risk]
  • Telecommunications services and technology: [Remote access, staff relocation]
  • Communications with customers, third parties and staff
  • Regulatory and compliance communications: [BCP should reflect current requirements]
  • Annual review and testing of business continuity plans

Since each crisis will be unique, here are two points to consider when activating your business continuity plan as challenges arise: 

  1. Understand the BCP in order to implement the plan. The challenge, if managers did not write the BCP, is that the plan must be understood in order to adapt to current circumstances. For example, a compliance officer for options trades cannot remotely access the systems online and the original planner is not available. The manager of compliance must believe he has the knowledge and responsibility to make a decision to adapt to the situation.

  2. Keep the majority of the plan and avoid re-inventing the plan. Fix what should be fixed and maintain the priorities of your business activities. Example: During a crisis, all staff are directed to work from home. The Department A head decides to recreate the plan as it relates to his team group by having his staff work from his house, have the firm make sleeping accommodations at a nearby hotel. For matters involving attendance in meetings with senior executives, for status updates, the head of Department A will go to a nearby executives home ten miles away to call in. The alternative: Maximize tools such as Microsoft Teams in order to continue to work together virtually, utilizing video conference capabilities to conduct group and senior executive meetings. 

By the time you are reading this article, you have faced the first challenge and you are still standing. FINRA Rule 4370 listed ten elements that require planning. Examples of some questions to consider as you oversee your business in the new normal are:

  • Are employees in place and are operations currently effective?
  • Are customers aware that we stand ready to meet their needs just like before?
  • Can our cash flow and net capital handle the potential stresses?
  • Are we getting the support we need from service providers and professionals?
  • Are controls and regulatory processes effective?

And more. 

FINRA‘s “Frequently Asked Questions Related to Regulatory Relief Due to the Coronavirus Pandemic” shares the following statements about filings: 

Filing annual reports: Based on discussions with the SEC staff, any member that (1) meets the exemptive provisions in SEA Rule 15c3-3(k) or (2) files a Part IIA FOCUS Report is being provided a 30-calendar day extension for submitting to FINRA their annual report related to fiscal years ending in January 2020 through March 2020. Further, the procedures set forth under Interpretation /01 under SEA Rule 17a-5(m)(1) are waived for purposes of this extension. 

Filing FOCUS reports with FINRA: Based on discussions with the SEC staff, any member that (1) meets the exemptive provisions in SEA Rule 15c3-3(k) or (2) files a Part IIA FOCUS Report is being provided a 10-business day extension for submitting any FOCUS report to FINRA related to a period ending in February 2020 through April 2020.   Further, the written application and procedures required pursuant to SEA Rule 17a-5(a)(6), and the related Interpretations, are waived for purposes of this extension. 

The National Futures Association (NFA) has also granted regulatory relief for many CFTC registrants. In particular, relief for Introducing Brokers (“IBs”) is summarized below. Relief related to other CFTC registrants can be found on NFA’s website, here.  

NFA is providing all independent IB Members with a 30 calendar day extension for filing certified financial reports for fiscal years ending in December 2019 through March 2020. NFA is also providing all independent IB Members with a 10 business day extension for filing the semi-annual, quarterly, or monthly reports for reporting periods ending February through April 2020. This relief is automatic. Independent IB Members should NOT file a request for this relief and are NOT required to notify NFA if they intend to avail themselves of the relief. 

Calm and common sense will prevail. It may help to remember that we, our employees, our customers, our service providers, and even our competitors are all in the same boat.